As external funding sources decline, African governments must find new ways to fund infrastructure projects. Domestic capital for Africa’s infrastructure offers a significant solution. According to the Africa Finance Corporation (AFC), $4 trillion in capital held by pension funds, sovereign wealth funds, and central banks is available within Africa.
Africa urgently needs infrastructure development, particularly in railways and power generation. However, traditional financing sources like foreign direct investment (FDI) and official development assistance (ODA) are no longer sufficient. In addition, high global interest rates, shrinking donor budgets, and protectionist policies in advanced economies are making external funds harder to secure. Therefore, domestic capital for Africa’s infrastructure could play a crucial role in closing this gap.
The AFC, which is owned by African governments, multilateral lenders, and private funds, stresses the need for a more resilient and internally anchored financing model. Governments must explore ways to mobilize the vast pool of underutilized domestic capital. Unlocking this internal capital is essential to supporting long-term development.
Currently, pension funds, sovereign wealth funds, and central banks hold much of the domestic capital. However, these funds are often invested in short-term, liquid instruments due to legal restrictions on their use. To address this, governments will need to reform regulations, allowing these institutions to direct capital toward long-term infrastructure projects.
To fully unlock domestic capital, African governments must modernize large sectors of their economies. Many parts of the economy remain untaxed and unregulated. By addressing this, governments can increase the pool of investable funds. Additionally, boosting national savings rates is another key step. Currently, savings in Africa are half those of Asian countries. As a result, raising savings rates will help governments raise the necessary funds for long-term infrastructure projects.
The African Development Bank (AfDB) has pegged Africa’s annual financing gap for structural transformation at over $400 billion, which represents nearly 14% of the continent’s projected GDP by 2030. Domestic capital for Africa’s infrastructure could help close this gap and accelerate the continent’s development.
Sovereign wealth funds, pension funds, and other financial institutions represent a largely untapped resource for financing infrastructure needs. Reforms to pension fund regulations will allow these funds to invest in long-term infrastructure projects, such as power plants, railways, and roads. In turn, these investments will help the economy while offering sustainable returns for pension holders.
In conclusion, domestic capital for Africa’s infrastructure provides a valuable opportunity for the continent to build the infrastructure it needs to support growing populations and economies. With external funding sources dwindling, the $4 trillion in domestic capital can offer a viable solution. By modernizing economies, reforming regulations, and boosting national savings, African governments can unlock this potential and fuel long-term development.
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